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Allen's Asphalt Pty Ltd v Kelleher [2010] QDC 444 (19 November 2010)

Last Updated: 19 November 2010

DISTRICT COURT OF QUEENSLAND

1. The plaintiff applies for judgment under UCPR rule 292. There is no contest, on the pleadings, that the claim is made out. What is in issue is whether the defendant has a valid set off sufficient to resist the application for judgment.

2. The claim is brought against the defendant pursuant to a guarantee and indemnity agreement. The defendant was the director of Kelleher Group Civil Pty Ltd (KGC). On 27 August 2009, KGC entered into a credit agreement with the plaintiff. On the same day, the defendant guaranteed payment to the plaintiff of all moneys due to the plaintiff by KGC. The guarantee included the following:
   1. I will indemnify the Supplier against any losses, costs, charges and expenses of any nature, which it might incur as a result of any default by the Customer or arising under this Guarantee.

   2. I will also be responsible to the Supplier for all outstanding monies due now or at any time in the future for Goods supplied by the Supplier to the Customer from time to time.[1]

3. The plaintiff supplied goods (a term defined to include services) and claims, from the defendant, an amount for the goods plus other amounts payable under the agreement between the plaintiff and KGC, namely $136,863.89.

4. The set-off is pleaded as follows. In or about April 2009, a company called Queensland Civil Services Pty Ltd (QCS) contracted with another company, Beech Constructions Pty Ltd (Beech) to reconstruct a car park at a shopping centre. QCS engaged KGS to ‘enter into the necessary contracts with third parties to complete the work required by’[2] Beech. In August 2009, the plaintiff supplied a quotation for certain works on the car park. KGC accepted the plaintiff’s quote on the basis that the plaintiff would complete the first part of the work by 17 September and the second part by 25 October. The plaintiff completed phases 1 and 2 but not within those times. The plaintiff’s work in those phases and phase 3 was of poor quality. Because of ‘the failure by the plaintiff to complete [phases 1 and 2] by the early completion date .... and because of the poor workmanship and quality of the [phase 1, 2A and 2b and 3]’[3] work, Beech failed to pay QCS’s invoice of $328,880.72. QCS mitigated its loss by negotiating a payment of ‘$170,000 in full and final payment for the works completed by it.’[4] QCS has ‘not been able to pay KGC $158,880.72 for’[5] KGC’s work in engaging contractors to perform the works under the agreement between QCS and Beech.

5. So, it is pleaded, KGC has a set-off against the plaintiff of $158,880.72, which would extinguish its debt to the plaintiff. And the defendant guarantor is not, therefore, liable to the plaintiff under the agreement to guarantee and indemnify.

6. Mr Kelleher, the defendant, deposes that he is the director of KGC and also was a director of QCS at the time QCS engaged in the contract with Beech (and presumably when QCS engaged KGC).[6] He repeats, in precise terms, the assertions pleaded in the defence, annexing some photos to show defects in the work done. He then states that he is informed by his wife, who is now the director of QCS, that QCS submitted invoices totalling $328,880.72 but that Beech ‘failed to pay the invoices ... as a result of the failure by the plaintiff to complete... and because of the poor workmanship and quality....’[7] He was informed by his wife that QCS mitigated its loss as pleaded.

7. Given the closeness and commonality of the directors involved, Mr Kelleher almost comically asserts:

‘KGC has requested QCS to pay the sum of $158,880.72 for the work performed by KGC in engaging contractors to perform the works under the [contract with Beech]. QCS has stated that it will not pay this amount due to the poor workmanship and quality of the [works] performed by the plaintiff as KGC’s subcontractor.’

8. There is no apparent relationship between the amount claimed by the plaintiff from KGC and the amount invoiced by QCS to Beech. Indeed, on the pleadings there is no apparent relationship between the work done by the plaintiff which gave rise to the “Customer Statement” the subject of the claim and the work referred to in the defence as untimely and poor in quality and giving rise to the set off. How then, could KGC, let alone the defendant/guarantor, rely on equitable set-off?

9. Two answers emerged at the hearing of the application. First, counsel for both parties confirmed the work done which gave rise to the claim was part of the work on the shopping centre car park complained about in the defence. Second, the defendant/guarantor relies not only on the doctrine of equitable set-off but also on s 553C of the Corporations Act 2001 (C’th), which relevantly provides:

Insolvent companies—mutual credit and set-off

(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and

(b) the sum due from the one party is to be set off against any sum due from the other party; and

(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

(2) .....

10. This provision comes into play because on 2 February 2010 the plaintiff served a creditor’s statutory demand on KGC under s 459E(2) of the Corporations Act. KGC did not seek to set it aside on the basis of an offsetting claim within 21 days. But on 26 February 2010 KGC appointed an administrator under s 436A of the Act. The deed of company arrangement was executed on 19 April 2010.

11. The application was conducted on the basis that (1) if the plaintiff were to file a proof of debt in the administration of KGC s 553C would require an accounting of the unliquidated claim for damages the defendant pleads in favour of KGC; and (2) that the defendant would be liable to guarantee only the resultant debt, if any. That is, it was ultimately uncontested that
    • (a) a claim for damages could be set off against the plaintiff’s claim;
    • (b) the claim for damages came within the terms ‘mutual dealings between’ the plaintiff and KGC;
    • (c) the defendant guarantor could rely on any set-off established by KGC, whether equitable or statutory.

12. Proceeding on that basis, the question becomes whether the defendant has a real prospect – on the basis of the set-off – of successfully defending all or part of the claim? Is there otherwise a need for a trial?[8]

13. The plaintiff argues the defence has no real prospect of success because the evidence in support of the set-off is insufficient. There is little evidence of the terms of the contract between Beech and QCS. There is no evidence (nor even an assertion) that it was reasonable for Beech not to pay $328,880 to QCS. There is no assertion or evidence that it was reasonable for QCS to settle its claimed dispute with Beech by accepting $170,000 instead of $328,880. There is no evidence of the contract between QCS and KGC, so no way to assess whether KGG had breached its obligations to QCS. So there is no basis for concluding that KGC was entitled to refuse to pay the plaintiff.

14. The defendant argues the set-off should be regarded as occurring automatically at the time of the execution of the deed of company arrangement, by analogy with the position in a winding-up.[9] The question which follows – whether at 26 February 2010 KGC was indebted to the plaintiff taking into account its claim for damages for breach of contract or negligence - should be decided at trial, this not being a clear case of a defence with no real prospect of succeeding.[10]

15. Proof of the facts supporting the set-off is largely if not wholly within the power of the defendant. The plaintiff was not privy to the agreements between Beech and QCS and between QCS and KGC, nor to the dealings among those entities which led to the asserted short-payment by Beech to QCS. The claim, a simple one pursuant to a guarantee upon the failure of KGC to pay for goods supplied (as defined), is prima facie made out. But the defendant claims to have suffered loss as a result of the failure of the plaintiff to complete work within expressly agreed time frames and as a result of the quality of the work, that is, in breach of express and implied terms of the agreement between the plaintiff and the principal debtor.

16. On the materials available, it is difficult to assess the reliability of the defendant’s claim that KGC suffered a loss of $158,880 because of the timing and quality of the plaintiff’s work. As the plaintiff submits, there is no evidence that QCS reasonably settled its dispute with Beech[11] and no clear explanation for the passing on of that loss through KGC to the plaintiff. On balance, however, I am not satisfied the deficiencies in the defence and the materials reveal a case with no real prospects of succeeding. Rather, the paucity of materials reveals the potential difficulties in assessing the value of any loss KGC may have suffered as a result of the claimed breaches by the plaintiff. Difficulty in assessing damages for breach of contract should not prevent a party having a trial anymore than it does not deter a court from making an assessment.[12]

17. In the circumstances, the application for judgment must be refused.

18. Although the principal debtor is under administration, the better view seems to be that it should be joined as a defendant.[13] The defendant argued that the plaintiff should be ordered to join the principal debtor, because it is said such joinder is for the benefit of the plaintiff. I favour the plaintiff’s argument that the defendant, having asserted and sought to rely on the debtor’s set-off, should meet the procedural laws of having that point properly determined.[14]

19. Mr Wilkins, counsel for the defendant, conceded the defence would need to be wholly repleaded. Mr Beacham, for the plaintiff, sought the retention of paragraph 1 of the defence, and Mr Wilkins did not seek to resist such an order.

20. The plaintiff submitted that, should the application for judgment fail, the defendant should be required to make a payment into court to secure the claim because any defence that is permitted to continue would be “thin and shadowy”. It may be that the strength of the claimed set-off is yet to be seen and will not be clear until the defence is re-pleaded. I am not prepared to call the defence thin and shadowy[15] although the defendant has much to reveal.

21. Because the defence is yet to be made clear I think the costs of this application should be reserved for the consideration of the trial judge.

22. As to the precise form of orders, I invite written submissions from Counsel within 7 days of this judgment, absent which, the orders will be:
    1. The application for judgment is dismissed;
    2. Paragraphs 2 to 16 inclusive of the Defence are struck out;
    3. The defendant is given leave to file an amended defence on condition that the defendant with due expedition take the necessary steps to apply to join Kelleher Group Civil Pty Ltd as a defendant to the proceeding;
    4. The costs of and incidental to this application be reserved.

[1] Statement of Claim paragraph 3

[2] Defence paragraph 6

[3] Defence paragraph 15(a)

[4] Defence paragraph 15(b)

[5] Defence paragraph 15(c)

[6] Therefore, Mr Kelleher’s company QCS engaged Mr Kelleher’s company KGC to engage contractors.

[7] Affidavit of defendant paragraph 16

[8] UCPR Rule 292

[9] Barton v Atlantic 3 Financial (Australia) Pty Ltd [2004] QSC 376; (2004) 212 ALR 348 at [40-49].

[10] Counsel referred to Queensland University of Technology v Project Constructions (Aust) Pty Ltd (in liq) [2002] QCA 224; [2003] 1 Qd R 259; Deputy Commissioner of Taxation v Salcedo [2005] 2 Qd R 233 and other cases.

[11] BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72

[12] See for example, HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640

[13] O’Donovan and Phillips, Modern Contract of Guarentee (Thomson Reuters subscription service)

[14] Counsel referred to the orders made in Doherty v Murphy [1996] VicRp 86; [1996] 2 VR 553

[15] Or tricky or suspicious: Duhs v Pettett  [2009] QCA 347